According to silverinstitute.org, the main segments of silver demand are expected to rise this year. Led by industrial and physical silver investment, global silver demand is expected to achieve a six-year high of 1.025 billion ounces in 2021.
“A lot of the mainstream media picked up the silver story, calling it a short squeeze, which was misguided. The real story that is happening is a physical squeeze in the market, where it is really difficult to get stock,” John Feeney told Kitco News.
“We continue to see robust demand for silver even after this pullback. We sold out of our holdings last week pretty quickly, and we are trying to re-stock. Even Australia’s Perth Mint had to stop taking orders on silver cast bars temporarily last week. We continue to see the physical squeeze in silver happening.”
Usually, when the market sees a significant increase in demand for physical metal, bullion dealers run out pretty quickly. “We are still seeing that,” Feeney said.
And the more demand there is, the longer the delays will be as refineries fall behind. “Also, you often see refineries limit their production to one standardized size and stop producing 10-ounce bars or 100-ounce bars and focus on kilobars.”
But, does this new demand translate to higher prices, and how soon? Feeney noted that it is a long-term bull play with a time period of about 12-24 months. He also added that silver could see the same bull rally as palladium.
“If you think of silver like palladium. Silver is an industrial metal that gets used up in solar panels and so forth. So, moving forward, if we continue to see a really strong increase in investment demand combined with strong fundamentals in industrial demand, quite quickly you could see the physical market dry up,” Feeney warned.
Often this becomes a self-sustaining cycle, where news around physical shortages in any commodity tends to attract speculators.
“This is similar to what happened in palladium. There was strong industrial demand in palladium, prices started to move into a bull market. You heard stories circulating around physical supply drying up. And then what happened was large speculators started entering the palladium market, and then the bull market really took off,” Feeney said. “I look at silver, and I could see something like that potentially happening over the next 12-24 months as the industrial demand continues to be robust as well.”
Silver Shortages Suggest We Are Only Months Away From $50 Silver
Premiums on physical silver coins are at records, and shortages are widespread internationally. This is only possible if silver futures are not priced for a sudden flood of monetary demand. Monetary demand for silver suddenly woke up in early February, causing shortages and rare backwardation in silver that we last saw in March 2020, September 2015, and February 2011 – according to seekingalpha.com.
Reddit Rally and Silver Shortage
At the turn of January and February 2021, the price of silver skyrocketed to its highest level since 2013, as retail investors flooded the market. It all started one week earlier when Reddit users coordinated their actions and sparked a rally in the GameStop shares. Another post on the r/wallstreetbets Reddit message board under the headline “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$” urged investors to buy silver. The idea was to expose a shortage of supply and to push prices up.
As a result, BlackRock iShares Silver Trust, the largest ETF tracking the silver, recorded unprecedented inflows, while silver prices were up more than nine percent on February 1, 2021, the biggest daily gain since the Great Recession.
However, a short squeeze similar to the one that happened in GameStop, is unlikely. This is because the silver market is much bigger and more liquid than GameStop. Before the recent actions inaugurated on Reddit, GameStop had a market cap of $1.4 billion, while the size of the silver market is in the hundreds of billions of dollars or even trillions! The silver to be found in London’s vaults alone is worth $48 billion. So, trying to corner the silver market would be like trying to drain the ocean.
Second, unlike GameStop, there are no holders of massive silver short positions. I mean, of course, there are many entities that have large short positions in the U.S. silver futures market, but these shorts are often counterbalanced by long positions in the London market. Moreover, money managers have actually had a net-long position on the metal since mid-2019. In contrast, GameStop was one of the most shorted stocks in the U.S. before the frenzy – according to SunShine Profits.
How to play out the coming silver shortage – article.